GOLDMAN: Developments that the Fed considers 'have been worse than almost anyone expected'

The Federal Reserve meets on Wednesday and Thursday to decide if
it will end the era of 0% interest rates, which it introduced
in December
2008 in its effort to
stimulate growth and
inflation in the wake of the global financial crisis.

"If the economy evolves as we expect, economic
conditions likely would make it appropriate at some point this
year to raise the federal funds rate target, thereby beginning to
normalize the stance of monetary policy," Yellen
said to Congress in July.

There's a decent crowd of economists who believe that the
Fed will hike rates on Thursday, which would be the first hike
since June 2006.

However, the economists at Goldman Sachs are part of the
majority who see the Fed waiting.

"Even if we
focus only on the economic data, it is hard to argue that
developments have beaten expectations on net," Goldman's Jan
Hatzius and Zach Pandl write. "Although the growth data have been
quite good and the labor market has improved further, both wage
and price inflation have fallen short of expectations. Once we
broaden the perspective to include financial conditions,
developments have been worse than almost anyone expected."

In addition to
its dual mandate of facilitating maximum employment and price
stability, the Fed has an unspoken third
mandate to promote stability in the financial market, which
is what Goldman highlights in it chart of its proprietary
financial conditions index (GSFCI). The GSFCI is a weighted
average of variables including the 10-year Treasury yield, the
TED spread, the spread between BBB rated bonds and the 10-year
note, average earnings per share, and a trade-weighted dollar
index. Tighter financial conditions reflect increased difficulty
in obtaining financing in the financial markets.

These metrics
have trended unfavorably with the dollar already strengthening
months and volatiliy slamming the global markets in recent
weeks.